Reforming the International tax rules the importance of a global approach
By Gabriela Ramos OECD Chief of Staff and Sherpa
Taxation creates an essential element of trust between governments and the societies and citizens they serve. Moreover, fair and efficient tax systems underpin the social contract. When used appropriately, taxation can be a powerful instrument to reduce inequality, and create opportunities for all citizens and companies to prosper in an increasingly competitive environment. However, when left unchecked, tax evasion and avoidance raise questions of economic fairness and efficiency, which are especially relevant in an environment plagued by fiscal consolidation, rising unemployment and social hardship. The problem has been getting worse over the years, as individuals and companies have honed their skills to exploit loopholes and inconsistencies in tax rules across countries.
Led by G20 Leaders and supported by the OECD, the international tax agenda has advanced in two key policy areas: tax evasion, by improving the transparency of financial flows through the exchange of tax information on; and tax avoidance, by taking comprehensive action to address the gaps and mismatches in tax rules that can cause profits to ‘disappear’ for tax purposes or allow profits to be shifted to low tax jurisdictions where little or no company activities occur – shifting the tax burden to individual taxpayers and small domestic companies. Once, the objective of tax authorities was to avoid double taxation. It is time now to avoid double non-taxation.
Tackling Tax Evasion through tax transparency
In 2009, the G20 committed to eliminating bank secrecy, and in only 5 short years we have seen a quantum leap in the efforts to improve transparency. Developed and developing countries, including financial centres, have demonstrated how they can work hand in hand to effectively fight against a lack of transparency that can enable tax evasion.
The first steps began with the reform of the Global Forum on Transparency and Exchange of Information for Tax Purposes, at the end of 2009. As a result, today the Global Forum has 122 members, including all financial centres and more than 60 developing countries, each of whom have committed to the international standard, exchange of information “on request”. The Global Forum is the largest existing Peer Review monitoring system which ensures that members have the appropriate legal and practical framework in place to effectively carry out their commitment to the standard.
Again responding to a call from the G20 in 2013, the OECD delivered the “next generation” tool for effective cooperation between jurisdictions on tax transparency: a single common global standard for the automatic exchange of information (AEOI). The AEOI standard was endorsed at the February 2014 meeting of Finance Ministers and Central Bank Governors. At the Brisbane Summit, the OECD will deliver the full AEOI package, including all the technical guidance which will allow countries to take the next step and move towards effective implementation.
The G20 and the OECD also recognise that developing countries face specific challenges to ensure AEOI, namely varying capacities to implement it in an effective and timely way. In February 2014, the G20 called on all financial centres to match G20 commitments to implement the AEOI standard in the short term, while noting that the timeline for other developing countries will depend on their ability to do so. The Global Forum is currently developing a roadmap to assist developing countries in overcoming obstacles to participation, allowing them to meet the standard and thereby accessing the benefits of improved global transparency.
Already over 60 countries, including all OECD and G20 members, have committed to implement the AEOI standard. A large and growing number of jurisdictions have further agreed to a detailed implementation timeline which will see the first exchanges taking place by September 2017. Further, as one of the main instruments to provide a legal framework for countries to participate in AEOI, the Multilateral Convention on Mutual Administrative Assistance in Tax Matters has to date been signed by 66 countries, including more than 10 developing countries, with another 15 jurisdictions covered by way of territorial extension.
If we are to be effective in tackling tax evasion, there must be no place left to hide. It is therefore critical that all countries, and in particular all financial centres, quickly commit and effectively implement the single global standard on AEOI. Ensuring a level playing field amongst countries is important, and the Global Forum, with its broad-reaching membership, has been mandated by the G20 to establish a mechanism to monitor and review the implementation of the new standard on automatic exchange of information.
Tackling tax avoidance through modification of tax rules
Tax transparency is not the only tax issue of international concern since the crisis. In recent years, there has been an unprecedented focus from both political leaders and the public about cross-border tax planning strategies that enable corporate profits to go untaxed. Tax policy is at the core of national sovereignty and yet in a globalised world with integrated economies, domestic tax systems designed in isolation are often not aligned, causing devastating and unintended effects on tax revenue. The impact is felt by both developed and developing countries, although the challenges to address these risks may be different across countries, both in their nature and scale. For instance, developing countries are more reliant on corporate income tax, which contribute on average 20% of tax revenues, compared to 8-10% in advanced economies.
G20 Leaders first identified the need to address Base Erosion and Profit Shifting as a priority for their tax agenda at the Los Cabos Summit. In 2013, the OECD presented the BEPS Action Plan, and the G20/OECD BEPS Project was born. Leaders called on member countries to examine how their domestic laws contribute to BEPS and to work together to ensure that international and national tax rules do not allow or encourage multinational enterprises to reduce overall taxes paid by artificially shifting profits to low-tax jurisdictions.
To ensure that the full range of BEPS challenges are identified and discussed, the G20/OECD BEPS Project builds on a broad engagement process, drawing on experience and perspectives beyond our member governments. Working through a number of avenues, including the G20 Development Working Group, there is in place a comprehensive program of targeted engagements with senior policy makers in developing countries to discuss their specific BEPS challenges and how they can best be addressed. We have held several major international meetings to engage with developing countries on BEPS over the last 18 months. In addition, the first in a series of regional consultations was attended by more than 100 countries and over 300 delegates, and the next round of dedicated regional consultations will commence in the second half of 2014.
We also are engaging in an ongoing dialogue to exchange ideas on BEPS issues with global business leaders, civil society groups, and labour representatives. The OECD is also working together with the United Nations, the World Bank and the International Monetary Fund to avoid a duplication of efforts and ensure complementarity of work streams. We are working closely with all stakeholders and have put in place a number of mechanisms to ensure a transparent process by undertaking a large number of public consultations, and providing access to discussion draft papers and webcasts.
The first elements of the 15-point OECD BEPS Action Plan will be delivered in 2014, with the remaining Actions to be completed by the end of 2015. In 2014 we have already seen significant progress on a number of areas including:
- identifying the tax challenges raised by the digital economy,
- developing revised standards for transfer pricing documentation,
- establishing country-by-country reporting that will ensure Multi-National Enterprises will use a standardised report format to provide information on their allocation of income, taxes and business activity on a country by country basis,
- as well as providing a report outlining options to more effectively address tax treaty abuse.
A Global Commitment
Today, the OECD and G20 are working in partnership alongside dedicated engagement with all stakeholders, to ensure that momentum is maintained to achieve the goal of an international tax system which can face the challenges of the 21st century economy. However, global commitment to this objective is required; and in the area of tax transparency in particular, the engagement of all financial centres is vital. G20 Leaders will continue drawing attention to the need to take collective action to deliver on these two important initiatives. Swift action and smart leadership at the domestic level will also be needed, to undertake the requisite national reforms. Better tax policies for better lives for our citizens!